If you are deciding to incorporate LLC, you must determine if the business structure will best meet your business' goals and need. Since not all business types fit with every business structure, you must address your business's long-term goals and business strategy when determining which entity is best for you.

Whether you are looking to register your business as an LLC or a corporation, you will need to start by filing paperwork with the state in which you plan to do business.

Incorporation Overview

When you officially incorporate your business, you move your business from a sole proprietorship to a formally-recognized separate entity. Many business owners enjoy this separation between a business and its owners. By keeping business and personal affairs separate, a business is not likely to suffer from problems incurred by one of its owners, such as bankruptcy, and the owners will not typically suffer the consequences of business debt or lawsuits.

Advantages of Incorporating Your Business

The many advantages of incorporating your business include:

  • The ability to attract investors by being able to issue shares of stock
  • The ability to take advantage of income splitting that may lower your overall tax liability

Disadvantages of Incorporating Your Business

Though there are many advantages to owners to incorporate an LLC, the disadvantages should be considered before making a final decision. Some of the disadvantages of incorporating your LLC are:

  • C corporation structures experience double taxation. Businesses will be subject to corporate tax when filing their annual return and shareholders will have to pay income tax on their earned dividends on their personal tax return.
  • Corporations are required to hold annual meetings and maintain a record of the minutes.
  • If designating your corporation as an s corporation for tax purposes, you are limited to having up to 100 shareholders.

Advantages of an LLC

There are many advantages to classifying your business as an LLC. Some of the reasons business owners choose to form an LLC include:

  • Limited liability benefits: Many owners choose an LLC to enjoy the benefits of limited liability. With an LLC, business owners cannot be held personally liable for business debts and actions.
  • A flexible management structure: An LLC offers much more flexibility in choosing your management structure. No formal management structure is required, such as corporations that require directors to oversee officers and officers to oversee the day-to-day functions of the business. LLCs can be member-managed or manager-managed.
  • Pass-through taxation: LLC eliminates the double taxation that occurs with c corporations by having the profits flow through to the individual's members personal tax returns.
  • Unlimited ownership: An LLC does not limit the number of owners/members of the business.
  • Fewer paperwork requirements: LLCs encounter fewer annual requirements, such as annual meetings with recorded minutes.

Disadvantages of an LLC

While there are many advantages to an LLC, business owners should be aware of disadvantages such as:

  • Owners cannot take advantage of corporate income splitting that may lower their tax liability.
  • An LLC cannot issue stock, which may limit the number of outside investors that it attracts.

Liability Protection of an LLC vs. a Corporation

Both business structures enjoy the benefits of limited liability for the owners with the protection of personal liability of business debts. Additionally, unless an owner is found to be directly involved in an injury or reckless behavior, their personal assets will be protected in the event of a lawsuit for both an LLC and a corporation. With both types, owners only stand to lose the amount of money they invest.

Management and Profit-Sharing: LLC vs. Corporations

With a corporation, a set management structure is in place, with directors making the main decisions that affect the business and overseeing officers that will manage the day-to-day aspects of the business. Shareholders are the owners of the corporation and receive profit from the company based on the number of shares of ownership they have.

An LLC requires no set management structure, and members can take any job title they choose as well as decide whether they want to be involved in daily business functions or assign a manager for those tasks. Each member owns a percentage of the LLC, and they receive their profits based on that percentage.

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